Marcus Norton on the 2012 CDP Global Water Report

By Marcus Norton 10 January, 2013

The head of CDP Water and Investor Initiatives gives his views on progress, stumbling blocks & hidden risks, The head of CDP Water and Investor Initiatives gives his views on progress, stumbling blocks & hidden risks

More corporates reporting on water risks as well as opportunities: both are more immediate than expected

Supply chain risks are hidden and likely to be significant for retailers; financial services sector water risk still poorly understood

Author: Marcus Norton

Marcus Norton is the Head of Water and Investor Initiatives, Carbon Disclosure Project. He joined the Carbon Disclosure Project (CDP) in 2009 to launch and manage CDP’s water program. The program builds institutional investors’ and businesses’ awareness and understanding of the financial risks and opportunities associated with water and catalyses action towards sustainable corporate water management. He also leads CDP’s engagement with the investment community.
Marcus’ background is in corporate law with Allen & Overy and Gibson, Dunn & Crutcher, and in government with the UK Department for Environment, Food & Rural Affairs where he wrote environmental laws and advised ministers and officials on matters of EC and public law.
He sits on the board of the Alliance for Water Stewardship and holds an MA from the University of St Andrews, an LL.M from University College London and an MBA from the Tuck School of Business at Dartmouth.
Read more from Marcus Norton →

China Water Risk talks to Marcus Norton, Head of Water and Investor Initiatives of Carbon Disclosure Project about the 2012 CDP Global Water Report described as a, “call to action for every company to treat water with the strategic importance it deserves.” CDP collects informationabout corporate behaviour on water security and climatechange.

This year’s report issued in October, was backed by 470 institutional investors, representingUS$50 trillion in assets. In all, 318 companies listed on the FTSE Global Equity Index Series (Global 500) operating in sectors that are water-intensive or exposed to water-related risks were invited to respond. The responses provide insight for investors into how companies are operating in a water-constrained world and allow them to consider their own global impact.

CWR: What were the major changes and improvements you witnessed in 2012 reporting?

Marcus:This represents our third Global Water Report. Some of the questions we ask companies have changed slightly over the 3 years so we can’t compare responses to all questions across the period. We do however have good direct comparability with 2011 and some responses really stand out.

We have seen a large jump in the proportion of companies reporting that they have already suffered detrimental impacts related to water. This leapt from 38% in 2011 to 53% in 2012. We saw a corresponding increase in the proportion of companies reporting exposure to water related risks that have the potential to generate a substantive change to their business, rising from 59% in 2011 to 68% in 2012. Also, over 60% of these risks have the potential to impact business within 5 years, highlighting the immediacy of the need to address them. I am not convinced that the world has become significantly riskier from a water perspective in the past year. Rather, I think companies are beginning to pay more attention to the issues and have a better awareness and understanding of how they might be impacted.

A second area where we have seen significant change over the past 2-3 years is in companies’ awareness of water risk in their supply chains. In 2010, the first year of our questionnaire, 47% of the responding companies weren’t able to tell us whether they were exposed to water related risk in their supply chain. This proportion fell to 38% last year and to 29% in 2012, so companies are beginning to come to grips with their supply chain. Also this year, 39% of our respondents reported that they are engaging with their suppliers, asking their key suppliers questions to report on their water use, risks and management. This was up from 22% in 2010 and 25% 2011, so although many companies still have some way to go in mapping and managing supply chain risk this represents encouraging progress.

CWR: Where do you think that increased awareness comes from?

Marcus: Unfortunately it often seems to take a catastrophe to grab peoples’ attention and to change behaviour. The 2011 floods in Thailand particularly hit the automotive and IT industries and severe droughts in the USA (last year) also help raise the profile of water risks and the number of respondents from the US, where a large portion of CDP’s global sample is based. Generally, significant events have pushed water issues up the agenda, and so it wouldn’t surprise me, if Hurricane Sandy has a similar effect in raising awareness in 2013.

Another important factor contributing to increased understanding amongst companies is the development of new tools. The WWF-DEG Water Risk Filter and offerings from the World Business Council for Sustainable Development, the Global Environmental Management Initiative, Ceres and the Water Footprint Network amongst others, enable companies to map and in some cases quantify risk.

CWR: In putting together this year’s report were you surprised by anything you found?

Marcus: The proportion of companies that see substantive opportunity in water has consistently surprised me. We had 71% reporting water opportunities in 2012 up from 63% in 2011. Of these opportunities, 79% are reported to have the potential to generate a substantive change within the next five years. The most frequently cited opportunities are cost savings, sales of new products and services, and increased brand value. These figures are pretty encouraging as increased profitability and growth can be powerful drivers of action.

The focus of our 2012 report was “collective action” and I was also surprised to see 74% of respondents reporting at least one such initiative in which they took action beyond their direct operations and sought to tackle water challenges in a wider context.

“71% reporting water opportunities in 2012 up from 63% in 2011. 79% …have the potential to generate a substantive change within the next 5 years”

“the Energy sector continues to have the lowest response rate (44%) despite 87% … flagging water risk as an issue”

“retailers for example …water risk is hidden further down the value chain – it may be very significant and is likely to be under-reported”

In terms of sectors, there are few surprises. Large proportions of respondents from Consumer Staples (78%), Utilities (76%) and Materials (71%) sectors reported exposure to water related risk as expected. However, the Energy sector continues to have the lowest response rate (44%) despite 87% of respondents from the sector flagging water risk as an issue.

One piece of feedback we frequently hear from companies that use relatively little water in their direct operations – retailers for example – is that they are surprised to be included in our sample. For some of these companies water risk is hidden further down the value chain – it may be very significant and is likely to be under-reported.

CWR: Would you include the finance and insurance sectors among those whose operations have a relatively low water footprint, but via projects and investments are exposed to greater risk then they realise?

Marcus: That’s an excellent question and I would certainly agree that water risk is still relatively poorly understood by most investors. Our task is to help investors understand where their risks really lie and having their portfolio companies disclose through CDP is an important step towards this.

CWR: Would you say that getting the financial services sector to consider water risk within portfolios represents a major challenge facing CDP Water over the next few years?

Marcus: I don’t know if it is a challenge or an opportunity – perhaps it is both – because this could be a substantial driver of change. As understanding of water risk improves within the financial services sector, investors of all classes will price it and include it in their investment decisions, driving capital to those companies that are able to demonstrate that they are managing their water risks.

CWR: One of the major conclusions from this year’s report seems to be that a collective response is required so what happens if sectors don’t move, or are not prepared to share their best practices for reasons of competitive advantage?

“.. the traditional approach where companies work independently to drive efficiency or quality improvements is unlikely to be sufficient”

Marcus: It is certainly true that the scale and complexity of water challenges globally means that the traditional approach where companies work independently to drive efficiency or quality improvements is unlikely to be sufficient. The evidence is that many companies are willing to work with their industry peers though some areas which are a source of competitive advantage are likely to be off-limits. However, we also see collaboration between companies in different industrial sectors, with communities and other users within specific watersheds, and with NGOs and governments. So opportunities are not just restricted to collaboration within a sector.

CWR: Were there any trends within the collaborative action reported?

Marcus: Collective action took various guises ranging from community engagement (reported by 56% of respondents), to supply chain or watershed management (43%), engagement in public policy (24%) and other forms of collective action (38%). Collaboration within industry coalitions such as the Sustainable Apparel Coalition, the International Council on Metals and Mining, and the Beverage Industry Environmental Roundtable was reported most frequently. But there were also many instances of cross-industry collaboration and knowledge-sharing in forums such as the CEO Water Mandate and the WBCSD, and deep dives in which companies engaged with NGOs to act on very specific projects, all of which I think is very healthy.

CWR: What do you see as the major challenges facing CDP Water in the next five years?

Marcus: Due to the complexity and local nature of water issues one of our main challenges is to continue to improve the quality of the data we collect. But this is not enough, it also needs to be comparable. Unfortunately, corporate water reporting is still pretty immature and currently the different tools available use slightly different metrics. So a key goal is to help drive convergence in standards so companies can use the same metrics and methodologies for measuring and reporting water. This consistency not only increases the comparability of data for peer group analysis which is useful for investors and other stakeholders but also reduces the reporting burden for companies.

CWR: Many companies complain about questionnaire fatigue, is this something that concerns CDP, and how do you propose to get around this potential pitfall?

Marcus: We are acutely aware of the burden of reporting and we constantly seek ways to minimise this. It is worth remembering that our water questionnaire was issued on behalf of a very large collaboration of 470 banks, pension funds, insurers, asset managers and foundations in 2012. So in essence companies are receiving one request for information instead of 470. We also carefully select which companies receive our water questionnaire, filtering indices so that our samples only include companies that are water intensive or are particularly exposed to water related risk. We also work hard to ensure we only ask questions which result in data that is meaningful and useful to investors, and are aligned with leading practice.

CWR: In order to further drive this convergence and further reduce the reporting burden on companies, is there any interest in working with some of the major sustainability indices to get them to include some of your questions in their own questionnaires?

Marcus: We regularly talk to SAM who manages the Dow Jones Sustainability Index. This is an area where there should be some relatively easy wins.

CWR: Your report found that water risk is a prominent and rising issue but do you think there still is a disconnect – do people understand that water is a very much business risk rather than just an environmental risk?

“While 60% of companies … responded to our questionnaire, 40% did not and it is unclear whether they recognise water as a strategic business issue”

Marcus: While 60% of companies in our Global 500 sample responded to our questionnaire, 40% did not and it is unclear whether they recognise water as a strategic business issue. One of the major barriers to this recognition is that water is frequently available to business at a negligible cost. The assumption is often that this reflects its value but it doesn’t – the true value of water to a business lies in business continuity, license to operate and brand value. Helping companies to understand this is critical.

Also, many companies see water as being an issue in 15 or 20 years, but for many sectors and geographies it is having an impact now. We’ve seen from our results that 53% of companies are already reporting some form of detrimental impact. Helping them realize that water could present near-term risk rather than some far off threat is essential.

“53% of companies are already reporting some form of detrimental impact”

Our questionnaire and reports therefore play a role by asking the right questions and by highlighting the challenges that companies are already experiencing and the ways in which leaders are tackling them, but with only 58% of responding companies giving water boardroom attention there is clearly still some way to go before water receives the attention it requires.

CWR: What sort of follow up support for responders is made available through the CDP water project?

Marcus: We do not provide a consultancy service but our reports are an excellent source of sector insight and leading practice. Through our website companies are able to look at the full responses of their peers which is often a good starting point when assessing what next steps to take.

CWR: Are there any other exciting initiatives you would like to share, and do you have plans to expand the programme in China?

Marcus: Our desire from the outset has been to extend our water program to China and it is a question of when we do this rather than if. It is simply a question of making sure we have adequate resources to do it properly, but it is high on our list of priorities.

In terms of other initiatives, we will be developing a scoring methodology for responses over the coming year, which will enable companies, investors and other stakeholders to assess how a company is performing on water much more easily. Responses to CDP Water are not currently scored.

We are also adding water to our supply chain initiative, which is a parallel programme that has been running for five years. This Supply Chain program for 2013 will see large procuring companies such as Unilever and L’Oreal asking their key suppliers to respond to our water questionnaire. This model has already proved effective for carbon and climate change in China and Asia more generally as key suppliers to many of the major global players are based in the region, and I very much hope the success will be replicated for water.

CWR: So how would you sum up three years of CDP Water Disclosure?

“I wouldn’t be doing my duty if I painted a picture that was too rosy. I’m not sure that even the most advanced company would claim to have cracked all of its water challenges yet.”

Marcus: If I were to sum up, I would say we’ve made good progress but we have a very long way to go. There are certainly grounds for encouragement with investors and companies beginning to recognise water as a strategic business issue. There are also leading companies that are developing and collaborating on innovative approaches, extending their focus beyond their direct operations to their supply chains and the watersheds in which they operate. These leaders have started to view themselves not merely as “water managers” but as “water stewards”. But I wouldn’t be doing my duty if I painted a picture that was too rosy. I’m not sure that even the most advanced company would claim to have cracked all of its water challenges yet. Also, while many companies have started to ask themselves the right questions, many more have yet to take their first step.

We have only just scratched the surface.

Further Reading:

Read our review of where corporates are with regards to water risk in Sink or Swim

US$1.8 trillion investors say water risk is beyond pricing: see what they say here

On collective action – see what Jason Kibbey, the head of the Sustainable Apparel Coalition has to say about this here